Fears Fuel Rise in Oil Prices

(Photo: AP)

Oil prices rose Tuesday, fueled by worries over supply disruptions and a series of naval exercises in the Strait of Hormuz by Iran. Brent crude gained $0.35, rising to $108.31 per barrel, by late morning trading in Europe, and U.S. crude was up by $0.28 to $99.96 a barrel. Previously it had topped $100 before dropping back.

Still, increases could have been driven even higher were it not for lingering worries over the eurozone debt crisis–that a slowdown in production brought by an economic slowdown will lower demand for the fuel. Reuters reported that on Saturday, Iran undertook 10 days of naval exercises in the strait, driving worries that the most strategic oil transit route in the world could be shut down should there be a military conflict between Tehran and Western nations.

Also driving worries, in addition to the Nigerian oil spill and production shutdown coupled with bomb attacks on Christmas, as previously reported by AdvisorOne.com, were outbreaks of violence in Iraq, where on Monday a suicide car bomber killed seven people in an attack on Iraq's interior ministry. This was just the most recent eruption between Sunni leaders and the country's Shiite-led government in the past week.

Syria, too, said Saturday that because of international sanctions imposed due to its nine-month crackdown on protesters against the government, its own oil production had fallen by a third.

In a note, analysts from JBC Energy led by David Wech said, "The year 2011 may be remembered in the annals of oil market history as the year of the supply shock. While the quicker-than-expected return of Libyan production has contributed to a general view that supply in 2012 will be ample, we would argue that this need not be the case."

JBC added, "The strong uptick in sectarian violence across Iraq is a serious cause for concern, as it could set back Iraqi production targets by years ... Iran also presents a major wild card."

However, supply concerns took a bit of a back seat to worries that slowing production throughout the eurozone and beyond, because of debt woes and recessions, would mute demand for oil and cause far larger worries than simply driving oil needs lower.